Key Tronic Corporation

You are currently holding for today's Keytronic fiscal year 2026 third quarter investor call. We are admitting additional participants and plan to be underway shortly. We appreciate your patience and ask that you please remain on the line. Good day, and welcome to the Keytronic fiscal year 2026 third quarter investor call. Today's conference is being recorded. After the presentation, we will begin the question and answer period. At this time, I would like to turn the call over to Tony Voorhees. Please go ahead.

Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Keytronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane, Washington headquarters is Brett Larson, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events of the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K and quarterly 10-Qs. Please note that on this call, we will discuss historical, financial, and other statistical information regarding our business and operations. Some of this information is included in today's press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast and the link can be found on our investor relations website. In addition, the slides together with the recorded version of this call will be available on the investor relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and the reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website. For the third quarter of fiscal year 2026, we reported total revenue of $89.6 million, compared to $112 million in the same period of fiscal year 2025. Year-over-year revenue for the third quarter of fiscal year 2026 continued to be adversely impacted by reduced demand from a legacy customer and an end-of-life program. Additionally, we also faced temporary challenges during the quarter related to winter storm fern in the southern U.S. customer design delays on a new program with a legacy customer, and delays in receiving allocated components on a separate new program. For the first nine months of fiscal year 2026, our total revenue was $284.6 million compared to $357.4 million in the same period of fiscal year 2025. Despite these short-term impacts, we are already seeing activity improve, with demand returning from several legacy customers and multiple new programs continue to launch and ramp driving expected revenue growth for the fourth quarter. Importantly, even with lower revenue in the third quarter of fiscal year 2026, we delivered an improvement in gross margin compared to the prior year period. This demonstrates the operating efficiencies gained from our cost-cutting initiatives during the past two years. Gross margin was 8% and operating margin was negative 0.3% in the third quarter of fiscal year 2026, up from 7.7% and negative 0.4%, respectively, in the same period of fiscal year 2025. Excluding the charges related to the China closure, which we will discuss in a moment, the adjusted gross margin was 8.5% for the third quarter of fiscal year 2026, up from 8.4% in the same period of fiscal year 2025. These results demonstrate that our business today is structurally more efficient and better positioned to generate margin as volume returns. In line with our long-term strategic plan, we continued to prepare for anticipated long-term growth by executing our nearshoring and tariff mitigation strategies to reduce costs while maintaining the diversity and flexibility of our key locations and capabilities. During the quarter, We continue to wind down manufacturing operations in China, shifting more production to our expanding facilities in the U.S. and Vietnam. The China wind-down is expected to be completed by the end of the current fiscal year and anticipated to save approximately $1.2 million per quarter following completion. As top-line growth returns, we anticipate margins to be strengthened by the improvements in our operating efficiencies and the positive impact of our strategic cost savings initiatives. We also believe the recent cost savings initiatives have made us more competitive when quoting new program opportunities. As production volumes increase and our operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance. The reduction in revenue had a significant impact on our bottom line. The net loss was $2.6 million, or 24 cents per share, for the third quarter of fiscal year 2026, compared to net loss of 0.6 million, or six cents per share, for the same period of fiscal year 2025. For the first nine months of fiscal year 2026, the net loss was $13.5 million or $1.24 per share compared to net loss of $4.4 million or $0.41 per share for the same period of fiscal year 2025. Our adjusted net loss was $2.8 million or $0.26 per share for the third quarter of fiscal year 2026. compared to adjusted net income of $0.1 million, or one cent per share, for the same period of fiscal year 2025. For the first nine months of fiscal year 2026, our adjusted net loss was $3.9 million, or 36 cents per share, compared to adjusted net loss of $1.2 million, or 11 cents per share, for the same period of fiscal year 2025. Our focus on operating discipline continues to support a strong balance sheet. Our inventory for the third quarter of fiscal 2026 is down $13.5 million, or 14% from a year ago. Our current ratio was 2.1 to 1, compared to 2.7 to 1 from a year ago. At the same time, accounts receivable DSOs were at 85 days. compared to 92 days a year ago, reflecting stronger collection on receivables. Year-to-date cash flow provided by operations for the first nine months of fiscal year 2026 was approximately 10 million, as compared to 10.1 million for the same period of fiscal year 2025. Our continuing ability to generate cash from operations has allowed us to reduce debt year-over-year by approximately $14.3 million and helps position us well as demand accelerates and new programs ramp. Capital expenditures in the third quarter were minimal, while year-to-date total capital expenditures through the third quarter were approximately $3.7 million. We expect CapEx for the full year to be around $5 to $8 million. largely spent on new innovative production equipment and automation. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, utilize leasing facilities, and make efficiency improvements to prepare for growth and add capacity. As we move further into fiscal 2026, we continue to face a lot of global economic uncertainties and volatile trade policies. Nevertheless, we are increasingly encouraged by the demand trends we're seeing as we enter the fourth quarter. Activity with several longstanding customers is improving, new programs are ramping, and our expanded US and Vietnam capacity is generating increased customer interest. Our improved operating efficiency makes us more competitive, resulting in a stronger pipeline of potential new business, and we remain focused on further improving our profitability. Our production backlog has grown, and we believe that we are increasingly well positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new product ramps in light of continued macroeconomic uncertainty, we are not providing forward-looking guidance in the fourth quarter of fiscal year 2026. That's it for me. Brett?

Thanks, Tony. Despite reduced demand from certain long-standing customers and the delays in production caused by winter storm fern in the third quarter, We're encouraged by the improvements in our operating efficiencies and by the gradual rebound in demand from several long-standing customers and the continued growth of new programs that we're seeing in the fourth quarter. We continue to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth. As we seize manufacturing operations in China, continue to right-size our Mexico facility and build out new production capacity in the U.S. and Vietnam. Our improved operating efficiency has made us more competitive, and we expect our revenue to gradually begin to rebound and see a return to profitability in the fourth quarter of fiscal 2026. As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties, and increasing costs associated with China-based production, we are winding down our facilities there and transferring programs to Vietnam. We anticipate savings generated from the shutdown to approximate $1.2 million per quarter once fully executed. As part of our global sourcing strategy, we will, however, continue to operate in China with a small team focused on sourcing critical components locally. Over the past 24 months, we have also reduced our total headcount by approximately 42 percent in Mexico and have begun transferring some programs from Mexico to the U.S. and Vietnam. Our Mexico facility continues to offer a unique solution for tariff mitigation under the existing USMCA tariff agreement, giving the sustained trend of continued wage increases in Mexico We have streamlined our operations, increased efficiencies, and invested in automation to be more cost competitive in the market. Due to the successful cost reduction and streamlining production processes, we have recently seen an increase in the quoting volume and probability of landing new programs manufactured in our Mexican facilities. We've also seen an influx of new customer visits and audits of our Juarez campus as of late that demonstrates we are competitive for a growing variety of quoting opportunities. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. We are very excited about the recent investments made in the U.S. and Vietnam to build out capacity and new capabilities to meet evolving customer demand. You will recall that we opened our new technology and resource and development location in Arkansas during the first quarter of fiscal 2026. Our US based production provides customers with outstanding flexibility, engineering support and ease of communications. We expect double digit growth in our facility in Arkansas during the upcoming fiscal year. You also recall that we have recently doubled our manufacturing capacity in Vietnam. that now has the capability to support anticipated future medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the US and Vietnam will enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainties surrounding the tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities. These initiatives reflect the longstanding customer trends, both to nearshore as well as de-risk the potential adverse impact of tariff increases and geopolitical tensions. During the third quarter of fiscal 2026, we won new programs in automotive technology, industrial tooling, pest control, and industrial power management. Our improved operating efficiency has also made us more competitive, increasing our sales pipeline, particularly in such steady growth sectors as utilities and data center equipment. Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. In light of the significant transitions and streamlining initiatives we've made in the past two years, it's worth reviewing our key competitive advantages going forward. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. First, we've enhanced our cost and tariff efficiency and the flexibility of our global manufacturing footprint. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to re-examine their traditional outsource strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart, long-term strategy. Second, many of our manufacturing program wins are predicated upon Keytronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program's specific design challenges make that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters. Third, we continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection, blow, gas assist, multi-shot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities. We're expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico, and Vietnam. Significant improvements in our operating efficiencies are creating a stronger pipeline of potential new business. Over the long term, we remain very encouraged by our cost reductions made over the past two years to become more market competitive. Our increasing cash flow generated from operations enhance global manufacturing footprint, and the innovations of our design engineering. All these initiatives have increased our potential for profitable growth. This concludes the full portion of our presentation. Toni and I will now be pleased to answer your questions.

Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we will take our first question from Matt Dane with Titan Capital Management.

Great, thank you. I did want to ask, you referenced you had four wins in your press release. Just wanted to get a sense of the size of each of those wins, as well as where they're going to be, where the manufacturing is going to be taking place, and then also expected timing of the ramps of those.

You bet. Happy to do that, Matt. So I think the first one, that automotive technology, that's about a $3 million to $5 million program that's slated to start in Juarez in fiscal 27. My expectation is we'll probably start ramping that in the second quarter. Next is the industrial tooling. This one is a bit unique. It was a design program that we started here in Spokane. Now they're wanting us to actually start building some low volume production. So we're actually going to do that in our downstairs facility here in Spokane temporarily while we ramp that. Currently it has about an order of about 3 million, but we're expecting that to grow. Ramp on that is immediate. Third is pest control. That's a $2.5 million opportunity incremental to some other business of an existing customer down in Juarez, Mexico. And then the last fourth is the industrial power management. That's an $8 to $10 million opportunity that'll start towards the end of the calendar quarter. So again, second quarter of fiscal 27. in our Springdale, Arkansas facility.

Great. I appreciate that, Brett. One other question I did have. So obviously, tariffs has been a key conversation point here for a while. You talked about your pipeline building. What role is tariffs playing today in conversations with prospective customers? And yeah, just help me understand all that if you could.

Yeah, there's quite a bit of moving parts, continue to be moving parts with related to tariffs. I think we're well situated now that we have an increased capacity to build product in Vietnam. The fact that USMCA is still a mitigation opportunity as well in Mexico and those that want a near shore in the US. So I think you know, we're seeing that a hesitancy to make a decision or to award us a program, some of that hesitancy is coming to close and we're actually seeing the actual awarded opportunities begin to pile up. So I think, you know, this hesitancy and uncertainty for so long of awarding a program and elongating that sales cycle now begins to, I think people are becoming okay with the fact that there's going to be continued uncertainty and we're actually seeing stocking levels decrease in certain key new opportunities and legacy customers. I think it's a change in the market of I'll wait and see what tariffs do to now It's a complete open, you know, continued changing in and out because of the required stock outs and reducing inventories. I'm going to need to make a decision. And so I'm making that in light of the uncertainty. That's a long-winded answer to I think we anticipate some wins that we've been waiting for for quite some time.

I'm glad to hear. I appreciate the insights, and that's all from me for right now. Thanks, guys.

Thank you. Once again, if you would like to ask a question, please signal by pressing star 1. And we will take our next question from George Melas with MKH Management.

Hi, George. Thank you. Hi. Good afternoon, guys. Nice to hear sort of a consistent story about increased capability in the number and capability of design engineers. Can you elaborate a little bit on that? And is that still very much, is sort of design complexity very much one of the focus of your sales opportunities?

Yeah, as we spoke before, George, part of our strategy is to continue to grow that design capability. So we're continuing to recruit and hire new design engineers. We have found it incredibly important for us to continue down that path. If you get into a customer relationship where you're providing design capabilities to them, not only is that business very sticky, you're also helping them design the product to be a good fit to your own production equipment and capabilities within your own factory. So we're going to continue down that road. What's kind of fun to see is this is the first design project that we're actually building within our Spokane facility with the engineers themselves. This is a little new to us. We've done this. many years back, but my expectation is that this may become a bit more of the norm, is we take over the design responsibility to bring a new product to market, and maybe they use our engineers to put the first series or set of products together.

Okay, great. That sounds good. Can you also give us a bit of an update on the data processing customer in Mississippi? I think that's a potentially very, very significant project, but I think it was always expected to ramp rather sort of slowly or progressively. Can you sort of update us on that?

You bet, George. Customer down in Mississippi continues to be flat quarter over quarter. So quarter two to quarter three is flat. Our hope is that that'll continue to ramp over time. But to date, it's been relatively flat. Over the last two quarters, there's not any real growth that we see in Q4, but maybe in fiscal 27. That's the consigned program, I think, that we spoke about at length a couple of quarters ago. But it still continues to be a very good program for us. It's just it's been fairly flat last two quarters.

Okay. And sort of what level it is now in terms of what you think it could be? Is it at a quarter of its potential, or how would you characterize it compared to what the potential expectation is?

That's a difficult one to quantify. You know, I think we're probably 50% of what our initial expectation was. But I think this is very market sensitive, and based off of where we're at today, you know, again, that's a tough one. I wish I had a crystal ball, George, but we're definitely not where we thought its capacity was, but, you know, it's a complete unknown at this point.

And I just add to that, George, that this customer has a number of SKUs that we could build. Yes. And we've actually built a few different SKUs for them already. So we're ready to take on more when it becomes available to us.

Yeah, the relationship is just very market sensitive.

Okay. Okay. Very good. And maybe just one sort of clarification. You guys mentioned in your prepared remarks that you can see a return to profitability in the fourth quarter. So basically it means next quarter. Yep. What kind of revenue level do you need in order to be, to hit that target?

Yeah, I don't know that we're yet giving guidance. Tony mentioned that there still is quite a bit of uncertainty in some ramps and the things that are going on. So I don't know that we want to quantify our revenue. Our expectation is definitely that there's going to be revenue growth Q4 sequentially from Q3. And we still feel strongly that we'll be in the black bottom line. You know, in future quarters, we'll readdress that. But at this point, I'd rather not give guidance.

Okay. And then just a quick question. In the last quarter, you mentioned potential savings from China from sort of stopping the, you know, closing the manufacturing operations there. And you also mentioned sort of one and a half million of savings related to the reduction in force in Mexico. Is that something that you've started to benefit from that has started to hit the bottom line, or do we really see that in the fourth quarter or in fiscal 27?

Yeah, thanks, George, for that question. So there in China specifically, we have completed our manufacturing operations there. So now we have a bit additional work to do just to get other materials and equipment out of China that we want to send to one of our other locations or sell it. So we do have a bit of work to do there. We completed that production in April, so just not that long ago. So we should start to see those employees severanced now, and we'll start to see improvements related to the 1.2 million that we mentioned in the script probably later this quarter.

Yeah, so I think the full 1.2 million won't be... Until Q1. Until Q1, but there is some incremental savings in this quarter, Q4, that we will see.

And with regard to the Juarez, Mexico question, we have completed that severance. We are seeing some revenue growth down there in our Mexico operations. So we didn't complete 100% of that severance, as we will need some of those employees as we're seeing some revenue growth there in that facility.

Okay. That's great. Okay. Great. Thanks very much. Thanks for taking my questions.

Thanks, George.

Thank you. Once again, if you would like to ask a question, please signal by pressing star 1. And at this time, we have no further questions. I would now like to turn the call back to Brett Larson.

Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thank you.

This does conclude today's call. Thank you for your participation. You may now disconnect.